Baer buys Merrill non-U.S. wealth business

NeilMacLucas

ZURICH--Julius Baer Holding AG Monday said it will acquire Merrill Lynch’s wealth management business based outside the U.S. and Japan from Bank of America Corp. and raise fresh equity to bolster its finances as the Swiss private-banking specialist seeks to widen its global footprint and reduce its reliance on Switzerland.

The Zurich-based bank said it will pay 860 million Swiss francs ($880 million), or 1.2% of the CHF72 billion in assets under management transferred as part of the cash and share deal which will boost total assets under management by 40%. Julius Baer currently has assets under management worth CHF179 billion.

Julius Baer said it will take on 2,000 Merrill Lynch staff including 500 financial advisers as it expands its private-banking network to include Bahrain, the Netherlands, India, Ireland, Lebanon, Luxembourg, Panama and Spain. Merrill Lynch has agreed to provide some products and services to Julius Baer as part of the deal which will take two years to be fully implemented.

“This acquisition brings us a major step forward in our growth strategy and will considerably strengthen our leading position in global private banking by adding a new dimension not only to growth markets but also to Europe,” said Julius Baer Chief Executive Boris Collardi.

Mr. Collardi has been in hunt for international assets from some time to broaden Julius Baer’s client base beyond Switzerland and Europe as the lingering impact of the financial crisis weighs on its bigger, more diversified Swiss private-banking rivals Credit Suisse
CS, +0.21%
and UBS
UBS, +0.10%
.

The Merrill Lynch deal follows last month’s commercial agreement with Bank of China Ltd. in which Julius Baer and the Chinese bank agreed to refer clients to each other and jointly market some investment products.

Late last year, the Swiss bank lost out to Brazilian-Swiss private bank Safra Group for a controlling stake in Bank Sarasin & Cie. Safra paid CHF1.04 billion to buy the stake in Basel-based Sarasin from Dutch banking cooperative Rabobank last November.

“I don’t see any immediate benefit to Julius Baer from this deal, and there are too many risks in the integration process, which is scheduled to run until 2015,” said Teresa Nielsen, an analyst at Vontobel.

“The Merrill Lynch business is not that profitable, and the price looks expensive given the integration costs, implementation risks and the need for additional capital increase,” Ms. Nielsen said.

Julius Baer said it will use existing funds and raise new equity over and above that needed to finance the Merrill Lynch transaction to bolster its finances. The bank will sell stock worth CHF740 million, of which CHF240 million will be issued to BofA. The bank will use CHF530 million of existing funds and issuing CHF200 million in hybrid securities to finance the deal itself.

“At that level of [assets under management] transferred, the capital required to support the incremental risk-weighted assets is expected to amount to about CHF300 million, and the total restructuring, integration and retention costs will amount to about CHF400 million,” Julius Baer said.

Julius Baer has long said it wants to expand and act as a consolidator in the industry, because gaining scale is the best way to deal with the pressure its is facing on margins. In June, the bank warned that profitability and private-banking margins were declining because of falling risk appetite among investors and reduced client activity.

Swiss private banks also have been looking for ways to protect earnings as a result of the U.S. crackdown on tax havens that likely will bring an end to the traditionally secretive Swiss banking model. Julius Baer is one of 11 Swiss banks under investigation by U.S. authorities looking into allegations the banks helped Americans evade taxes.

Clients want good returns rather than just have their assets protected from taxes, which means banks have to focus much more on investment advice. This is likely to lead to more mergers and acquisitions between banks as the new service requires heavy spending on information technology and personnel. Larger banks are expected to snap up the smaller, unlisted banks as part of the industry consolidation.

Perella Weinberg Partners acted as exclusive financial advisor to Julius Baer Group on the transaction.

Julius Baer stock closed at 35.43 Swiss francs on Friday, for a year-to-date decline of 3.6%.

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